Summary
- Parsley Energy is acquiring Jagged Peak Energy in a $2.27 billion all-stock deal.
- Parsley Energy can realize meaningful synergies from the merger, given the assets of both companies are located close to each other.
- Parsley Energy might not be able to extract free cash flows from Jagged Peak’s assets but I think the combined company will likely overcome this challenge.
Parsley Energy (PE), the Permian Basin focused oil producer, has recently agreed to buy smaller shale driller Jagged Peak Energy (JAG) in all-stock deal valued at $2.27 billion. The merger will give Parsley Energy the scale advantage as it significantly expands its footprint in the Permian Basin while realizing merger-related synergies and cost savings. The deal, however, clouds Parsley Energy's short-term outlook for free cash flows. But I think its long-term prospects are still looking good.
Image: Parsley Energy
Parsley Energy and Jagged Peak Energy have entered into an agreement under which the former will acquire the latter in a tax-free, all-stock transaction of $2.27 billion, including Jagged Peak's net debt of approximately $625 million. Jagged Peak shareholders will receive 0.447 shares of Parsley Energy stock for each share of Jagged Peak common stock they own. The deal, which has been unanimously approved by the boards of the two companies, is expected to close in Q1-2020. Subsequently, Parsley Energy will own 77% of the combined company while Jagged Peak shareholders will own the remainder.
Image: Parsley Energy. Investor Presentation, October 2019.
Overall, it appears that Parsley Energy has made a good purchase. The company is buying Jagged Peak at a time when oil stocks have fallen by double-digits due in large part to persistent weakness and volatility in commodity prices. Jagged Peak's shares were down 25% on a year-to-date basis when the acquisition was announced. Parsley Energy is getting Jagged Peak at a good price which is equivalent to $7.59 per Jagged Peak share which represents a premium of just 1.5% of Jagged Peak's 30-day volume-weighted average price and 11.2% of Jagged Peak's closing price on October 11. Parsley Energy expects the acquisition to be accretive to cash flow per share, free cash flow per share, cash return on capital invested, and net asset value.
The acquisition will enable Parsley Energy to expand its footprint in the Permian Basin and realize some of the scale advantages which the big boys of the industry, such as Pioneer Natural Resources (PXD), enjoy. The new company's acreage will be spread over 267,000 net acres at the Permian Basin, up from roughly 189,000 acres Parsley Energy currently holds. The combined company's production will be 27% higher than Parsley's second-quarter output. The new Parsley Energy, however, will remain a mid-cap operator and substantially smaller than companies like Pioneer Natural Resources which own around 680,000 net acres at the Permian Basin's Midland region. Like both Parsley Energy and Jagged Peak, I think the combined company will also be an acquisition target.
